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What is Escrow?

Dear Phyllis,

I bought my La Crescenta property many years ago from my cousin and we did not use a Realtor® and I don’t remember using an escrow company. My daughter and her fiancé are buying a home and have opened escrow. What does escrow do? Thank you, Just Curious

Dear Curious,

Once an offer is accepted there is an earnest money deposit (aka good faith deposit). This deposit is held by escrow. The money isn’t in the seller’s hands but is being held by escrow who is a neutral third party. When escrow closes this deposit is credited from the buyer to the seller.
Escrow keeps this deposit which protects both parties. Imagine if the buyer’s deposit was transferred directly to the seller and the home didn’t pass the buyer’s inspection. It might be difficult for the buyer to get their deposit refunded if the seller already spent the money. On the other hand, a home seller will not want to sign over the deed to the home until he’s been paid. And the buyer wouldn’t hand over all of their funds without clear title. Escrow handles all of these details.

Likely you have heard the term, “escrow closing” or “close of escrow”. When escrow closes the deed transferring title has been recorded and the sale is complete. The escrow officer oversees the final paperwork and handles the exchange of funds and recording of deeds. This person, (in some states an attorney is used in lieu of escrow), will ensure that all the money is properly disbursed, that the documents are signed and recorded, and that all necessary conditions of the original purchase agreement are met before closing the escrow. Once closed, escrow disburses the monies and provides the buyer and seller with a detailed accounting in their Final Closing Statement.

Home sellers renting back the home from the buyer after closing are common in this market. This allows the seller time to leisurely plan their move. In these instances escrow will close and the seller will remain in possession as a “Rent Back”. In this case, escrow may hold back from the seller’s proceeds the negotiated rent.